Escalating headwinds to haunt Singapore retail REITs in 2016: report

Opt for suburban-focused retail REITs, analysts urge.

Analysts are bearish on what lays ahead for retail REITs this year, as structural obstacles like the ongoing labour crunch and continued competition from e-commerce platforms are expected to persist.

According to a report by OCBC, Singapore’s retail sales grew 2.9% YoY for the month of December 2016, but this was due mainly to motor vehicles. Stripping this out, retail sales would have dropped 3.6%.

Citing CBRE figures, OCBC notes that the total net absorption for the retail sector came in at -0.15m sqft in 2015, reflecting the first negative figure since 2011.
Data points from URA also reveal that rentals of the private sector retail space in the Central Region dipped 1.3% QoQ in 4Q15, which marked the fourth consecutive quarter of decline.

Moreover, rentals of retail space came in lower by 4.1% in 2015.

With such a lacklustre backdrop, OCBC asserts that it was unsurprising that retail REITS largely registered muted rental reversions in 4QCY15. Further, this trend is expected to haunt REITs in 2016 as well.

OCBC thus favours more defensive suburban-focused retail REITs, like Frasers Centrepoint Trust.